Monday, December 21, 2009

Where we went wrong...

I've been reading the 1776 economics doorstop known as Wealth of Nations. Adam Smith was telling the truth when he promised to be tedious (see prior post). I'm only about 50 pages through it, but I'm already wishing I'd started reading it 30 years ago (because then I'd have finished last week).

What struck me today was the following [with my clarifying words]:

"In many great works, almost the whole labour of this kind [overseeing a corporate enterprise] is committed to some principal clerk [Chief Executive Officer]. His wages properly express the value of this labour of inspection and direction. Though in settling them some regard is had commonly, not only to his labour and skill, but to the trust which is reposed in him, yet they never bear any regular proportion to the capital of which he oversees the management; and the owner of this capital, though he is thus discharged of almost all labour, still expects that his profit should bear a regular proportion to his capital."

-- Adam Smith, in Book I, Chapter VI of Wealth of Nations

Pretty thick stuff, so here's my modern translation that includes ideas from the surrounding text to get what Smith was driving at

The wages of a CEO overseeing a corporation are based on the value of his labor inspecting and directing the operation, and to some extent the trust invested in him by the shareholders. But his wages are not proportional to the capital of the corporation as it is not the CEO's capital at risk. The owner of the capital (the shareholders) expects profit that is proportional to the capital they have invested and have at risk.

Smith is basically saying that CEO's pay shouldn't be proportional to the capital that they oversee! Try that idea out on one of our present CEO's and you'll find that it would simply be heresy.

I'm beginning to think that the widespread holding of corporate shares by the average wage earner is "capital" that doesn't actually get the rights that are supposed to go with capitalism. I think us peons are getting capitalisn't.